## What Are Cryptocurrencies like Bitcoin, Ethereum and Ripple?

## Source details

**Canonical URL:** [What Are Cryptocurrencies like Bitcoin, Ethereum and Ripple?](https://www.imf.org/en/publications/fandd/issues/2018/06/what-are-cryptocurrencies-like-bitcoin-basics)

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## Bibliographic details
- Authors: VIKRAM HAKSAR, ANTOINE BOUVERET
- Published: June 1, 2018

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### Summary overview
- Cryptocurrencies and their underlying technologies offer benefits but also carry risks.
- Distributed ledger technology could reduce the cost of international transfers and foster financial inclusion.
- The first cryptocurrency, Bitcoin, was introduced in 2009 by a programmer (or group of programmers) using the pseudonym Satoshi Nakamoto.
- As of April 2018, there were more than 1,500 cryptocurrencies, according to coinmarketcap.com; along with Bitcoin, Ether and Ripple are the most widely used.

### Uses of money (context for cryptocurrencies)
- Money serves as:
  - a store of value,
  - a means of exchange for goods and services,
  - a unit of account that measures value.
- Historical evolution:
  - Commodity monies (seashells, copper, silver, gold) preceded fiat money.
  - Paper fiat money appeared in eighth century China under the Tang dynasty.
- Modern central banks seek to maintain price stability by regulating the supply of money on behalf of governments.

### Bookkeeping and ledgers (centralized model)
- Financial systems required trusted intermediaries and credible accounting systems; double-entry bookkeeping was a major innovation.
- Central banks validate transactions among financial institutions in a central ledger.
- Example transaction flow in the centralized model:
  - Bank A debits Mehrnaz’s account.
  - The central bank moves money from bank A to bank B and records the transaction in its central ledger.
  - Bank B credits Mary’s account.
- The system is based on trust in the central bank and its ability to safeguard the integrity of the central ledger and prevent double spending.

### Distributed ledgers and cryptocurrency mechanics
- Many cryptocurrencies rely on distributed ledger technology, such as blockchain, maintained across a network rather than by a central agent.
- Double-spend prevention: each member of the network verifies and validates transactions using computing and cryptography; a decentralized consensus is required before a transaction is added to the ledger.
- The ledger provides a complete, permanent transaction history that cannot be manipulated by a single entity.
- Network validators (miners) are usually rewarded with newly minted cryptocurrency.
- Pseudo-anonymity: holders have two keys:
  - a public key (like an account number),
  - a private key required to complete a transaction.
- Transaction example in the distributed model:
  - Mehrnaz (public key ABC) initiates a transfer to Mary (public key XYZ) using her private key.
  - Network members verify ABC has the funds by solving a cryptography puzzle.
  - Once validated, a new block is added to the blockchain and the transfer from ABC’s wallet to XYZ’s wallet is recorded.

### Benefits and risks
- Limitations relative to basic functions of money:
  - High price volatility limits use as a store of value and unit of account.
  - Limited acceptance for payment restricts use as a medium of exchange.
  - High production cost for many cryptocurrencies reflects the large amount of energy needed to power computers that solve cryptographic puzzles.
  - Decentralized issuance means no entity backs the asset; acceptance depends entirely on users’ trust.
- Potential benefits:
  - Distributed ledger technology could reduce the cost of international transfers, including remittances.
  - Some payment services now make overseas transfers in a matter of hours, not days.
  - The technology can be used to securely store important records, such as medical histories and land deeds.
  - Potential to foster financial inclusion.
- Potential risks:
  - Pseudo-anonymity makes cryptocurrencies vulnerable to use in money laundering and terrorism financing if no intermediary checks transaction integrity or identity.
  - Cryptocurrencies could eventually present challenges for central banks if they affect control over the money supply and the conduct of monetary policy.

_What Are Cryptocurrencies? VIKRAM HAKSAR, ANTOINE BOUVERET, June 2018, F&D Magazine (IMF)_

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_Source: https://www.imf.org/en/publications/fandd/issues/2018/06/what-are-cryptocurrencies-like-bitcoin-basics_